Pandora Slumps, Collects Two Analysts Downgrades

By Teresa Rivas

Shares of Pandora (P) were down more than 12% at recent check. The company’s second-quarter earnings report, out after hours Thursday, beat expectations, but investors were focusing on the company’s mixed guidance.

The shares hit a new 52-week high earlier in the week, when the Street was more upbeat about the company’s prospects.

Today, analysts are weighing in on the report, and two cut their ratings.

Raymond James’s Aaron Kessler downgraded the stock on the news: “We are downgrading shares of Pandora to Market Perform from Outperform. While Pandora delivered a strong 2Q driven by increasing mobile monetization (mobile revs up 92% y/y) and lower content costs, we believe the risk reward on shares is now more balanced with shares up ~130% YTD and trading above our previous $20 PT (DCF). Additionally, while largely explained by the mobile cap, listener metrics slowed in 2Q and the launch of Apple’s iRadio (expected in September), could create some headline risk for shares.”

Stifel Nicolaus’s Jordan Rohan also downgraded the stock after the report: “We have reduced our rating on Pandora from Buy to Hold. Three reasons: 1) The investment story for Pandora has shifted back from a focus on margins, including constraints on hours streamed, to a focus on market share at the expense of margins. 2) Upside in the July quarter came from sub revenues, not ad revenues, and this growth in subscriber revenues is likely to subside. 3) Shares were within 6% of our prior $23 target, not providing sufficient upside to ride through the volatility that comes with intensifying competition in the Internet radio market.

Here’s an alphabetical compilation from analysts that didn’t change their ratings, although a few did boost their target prices:

B. Riley & Co.’s Sameet Sinha maintained a Buy rating and $26 price target: “Pandora delivered solid FY2Q14 results with a beat on top and bottom line. Guidance was mixed as higher than expected revenue growth will be offset by investments in functionality and listener experience. The company will be removing the cap on mobile listening due to narrowing contribution $ gap between advertising and subscriptions, and not due to competition. There will be some incremental investments into listener experience. Our revenue estimates increase 1-2% for FY2014/FY2015; our FY14 PF EPS declines from $0.04 to $0.01 but FY15 increases from $0.21 to $0.23 as we had anticipated some of these investments.”

BMO Capital Market’s Edward Williams maintained an Outperform rating and increased his target price by $3 to $25: “Mobile monetization continued to improve and has reached the inflection point where the mobile listening hour cap can be lifted, six months after the cap was put in place. While we expect the business to become more profitable we also anticipate that Pandora will continue to invest in its business for the long term as it looks to further tap into the radio market. Mobile listening also continues to absorb a greater portion of total listening hours (80% vs. 75% a year ago), driven by smartphone and other mobile device adoption.”

Canaccord Genuity’s Michael Graham maintained a Buy rating and raised his target price by $1 to $25: “Pandora’s Q2 results were strong and we believe the company is in the early stages of ramping monetization efforts. Enabled by a combination of heaver mix towards subscription hours and higher ad loads, mobile ad RPM of ~$34 was very robust. Pandora is removing its 40-hour mobile listening cap, which may dampen gross margin and limit paid subscriber additions in the near term. In addition, with the stock up ~32% since the Q1 earnings call, we would not be surprised to see some volatility, but we believe business momentum is strong.”

Cowen & Co.’s John Blackledge maintained an Outperform rating and raised his price target by $1 to $23: “For 2014, revenue (non-GAAP) guidance rises to $640-655MM from prior $615-635MM. Non-GAAP EPS guide to $0.00-0.05 vs prior $(0.02)-0.08 as P expects to channel revenue upside into higher investment in S&M and product which we view as the right longer-term call given the oppty. We raised FY14 revenue (non-GAAP) to $655MM vs. $635MM prior and kept EPS intact at $0.00.”

Credit Suisse’s S. Ju maintained a Neutral rating and $19 price target: “Advertising revenue fell shy of our estimate but was consistent with last quarter, as Pandora reported $128.5mm in ad revenue versus our $137mm. That said, Pandora continues to exhibit rapid increases in its mobile ad RPM, as it grew 53% versus 30% in 1QFY14. Desktop RPM also showed modest acceleration as well. Once again subscription revenue was better than expected, which offset the shortfall in advertising revenue. Even as we raise our RPM estimates for both mobile and desktop, Pandora also announced its intent to step up its investment activities in both sales and marketing and product development, which does compress our EPS growth estimates near term, but as we assume the company grows into the elevated level of OpEx, our longer-term estimates do march higher.”

Needham’s Laura Martin maintained a Buy rating and $25 price target: “The core streaming business has crossed breakeven, as evidenced by desktop revenue per thousand listening hours (RPMs) of about $50 and mobile RPMs of about $29, well above content costs of $20. We expect rapid margin expansion in the core business. P is investing in salesmen to buy an option on the $14B local radio adverting market. This investment is hurting their reported valuation multiples today, but we expect the potential ROI on local to be higher than core business over time. Revenue growth upside is provided by cars, where P generates zero revenue today and has a 5 year lead over competitors.”

Lazard Capital Markets’ Barton Crockett maintained a Neutral rating: “Our model updates after Pandora’s F2Q14 earnings report emphasize the evolving nature of the model — usage caps coming off, revenue estimates up, earnings estimates down. We note Pandora’s argument that Apple’s music cost benchmark is favorable, but wonder why Pandora doesn’t take it. We agree the revenue opportunity is substantial, but see the September iTunes Radio launch as a big test of the durability of Pandora’s appeal.”

Pacific Crest’s Andy Hargreaves maintained an Outperform rating and $24 price target: “Revenue guidance supports 2H inflection in advertising monetization. The large increase in Pandora’s revenue guidance is not only attributable to more-than-expected FQ2 subscribers, but also implies a stronger-than-expected ramp in mobile monetization in 2H. This supports our outlook that continued share gains in local radio advertising should drive an inflection in monetization in 2H and into C2014. Higher revenue estimates are offset by operating investments. We are raising our F2014 revenue estimate to $651.8 million from $640.1 million and our F2015 revenue estimate to $874.7 million from $868.5 million. Higher operating investments drive our non-GAAP EPS estimates lower.”

Susquehanna’s Brian Nowak maintained a Positive rating and lowered his target price by $1 to $24: “Despite the modest advertising miss (which drove the stock down in after-hours trading), we are encouraged by P’s progress in local advertising. The company said 2Q:14 local ad revenue was up 4X YoY and was nearly equal to total local ad revenue in all of FY’13, likely exceeding our estimate of ~$5mn of local in the quarter. We remain bullish on P’s ability to garner incremental share of local radio budgets and note that local ad dollars could likely accelerate in 2H:14 and into FY’15 as P’s new local sales force rolls off their 6 month non-compete limitations (most of the sales people were hired in 4Q:13 and 1Q:14).”

Wedge Partners doesn’t publish ratings and price targets, but here’s Martin Pyykkonen’s take: “We think that Pandora’s 2QF14 results again demonstrate that the Internet radio advertising model is solid and further leverage is being gained in content licensing costs, as Pandora’s sales force expands and the advertising sales load increases as a percentage of available inventory, while still staying far below (~10%) terrestrial ad load rates per hour.”

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Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.